Second Financial Sector Balloon Effect from Bank Regulations... Will a COVID-19 Loan Bomb Explode?

Concerns Over COVID-19 Loan Defaults Spread Across Financial Sector
Pressure on Household Loan Volume Management Raises Bank Lending Thresholds
As Major Banks Tighten Loans, Demand Shifts to Secondary Financial Institutions

[Asia Economy Reporter Jo Gang-wook] Concerns over a surge in non-performing loans triggered by the COVID-19 pandemic are spreading across the entire financial sector. The government's tightening of regulations on commercial banks has sharply increased loan demand at savings banks, credit card companies, and insurance firms, raising fears that this could act as a balloon effect, ultimately fueling non-performing loans in the secondary financial sector.

Although the government limited regulatory targets to high-income and high-credit borrowers, it has simultaneously strongly ordered 'total household loan volume management,' forcing banks not just to raise lending thresholds but to close their loan windows one by one. As a result, the increased loan demand caused by the resurgence of COVID-19 is being pushed toward the secondary financial sector. The tightening of supply has ironically led to increased demand, prompting voices that the failure of real estate policies may be repeating itself in the loan market.

According to financial authorities and the financial sector on the 11th, household loans in the financial sector increased by 103 trillion won from the beginning of this year through November, showing a record-breaking surge despite the government's successive loan regulations. Compared to the increase of 48.4 trillion won during the same period last year, this is more than double. During this period, household loans at banks increased by 94 trillion won, while loans in the secondary financial sector, including savings banks, rose by 9 trillion won. Notably, in the secondary financial sector, loans surged by 4.7 trillion won in the past month alone, exceeding half of the annual increase. This is interpreted as a strong movement to secure loans in advance following the government's tightening of credit loan regulations, causing not only banks but also the secondary financial sector to stir due to the balloon effect.

In fact, according to the Bank of Korea, bank household loans in November reached 982.1 trillion won, increasing by 13.6 trillion won from the previous month?the largest increase since related statistics began in 2004. This was largely due to a rush of last-minute demand ahead of the credit loan regulations strengthened on the 30th of last month, causing a sharp rise in credit loans and other loans such as overdraft accounts. Particularly, other loans increased by 7.4 trillion won last month, unusually surpassing the increase in mortgage loans (6.2 trillion won). The scale of increase in other loans was also the largest since 2004.

◆ As Banks Raise Lending Thresholds, Borrowers Move to High-Interest Secondary Financial Sector... Will This Become a Non-Performing Loan Bomb? = The rapid increase in loans other than those for home purchases and credit loans continues. The balance of housing subscription savings secured loans at the four major commercial banks?KB Kookmin, Shinhan, Hana, and Woori?stood at 1.8318 trillion won in November, a 32.6% surge compared to 1.3806 trillion won in January. Housing subscription savings secured loans, which allow borrowing 90-95% of the saved amount, fall under deposit-secured loans. Since only the principal is used as collateral, borrowing does not affect the subscription function, making it a means to circumvent loan regulations. Both movable property secured loans and technology finance loans are also steadily increasing.

Given this situation, financial authorities, concerned about loan delinquencies, pressured commercial banks to 'manage total household loan volume more strictly,' leading banks to raise lending thresholds further by eliminating preferential interest rates on loan products or even halting product sales altogether.

Consequently, concerns are growing within the financial sector that as commercial bank loans become restricted, loan demand will shift to the secondary financial sector, resulting in a chain reaction that increases the borrowing burden on financial consumers. The main customers of the secondary financial sector are mostly vulnerable borrowers such as those with medium to low credit and low income, and the average interest rate in the secondary financial sector is in the mid-to-high teens percentage-wise, imposing a heavier interest burden compared to commercial banks. This raises the risk of household loan delinquencies, especially among vulnerable borrowers with lower repayment capacity. Moreover, with the third wave of COVID-19 expected to further worsen the economic situation, there are forecasts that this could lead to loan delinquencies in the small and medium-sized enterprises and small business sectors.

A financial sector official said, "Recently, financial authorities decided to strengthen loan inspections in the secondary financial sector to prevent the balloon effect, but borrowers who must secure funds by any means sometimes take out loans at high interest rates through peer-to-peer (P2P) lending platforms." He added, "The currently low delinquency rate is a visual illusion due to policy effects, and there is concern that unforeseen balloon effects could collapse the financial market structure."

This content was produced with the assistance of AI translation services.